As F-35 Cost Estimate Rises, Canada Has Procurement Concerns

In what is becoming an annual event, the Pentagon has again revised the estimated cost of developing, buying and operating the Lockheed Martin F-35. In this latest pricing increase, the Defense Department estimates the program will total $124.2 billion (9%) more than the $1.385 trillion forecast only a year ago through a projected 55-year fleet life.

This is the latest challenge for a program whose customers are already unhappy with what they see as excessive cost and management problems. However, U.S. Air Force Maj. Gen. John Thompson, F-35 deputy director, says the estimates include many assumptions that are likely to change, such as the amount set aside for spares and fuel, and reflect the long projected fleet service as well as development, which began in 1994.

Cost increases continue to rattle international customers. However, a recent report by Canada's auditor general questions the process its government used to select the F-35 to replace its F-18s. The auditor cites a lack of coordination among Canada's relevant defense and procurement officials, a downplaying of the F-35's actual cost and a seemingly fast-tracked process that led to a sole-source decision for the stealthy fighter. Though the report does not suggest halting the F-35 buy, Canada's political opposition has pounced on it and is calling for a review. Prime Minister Stephen Harper notes that Canada has not yet signed a contract and is keeping its options open.

Such political scrutiny of the F-35 has ebbed and flowed in the governments of various international customers, including Norway and Australia. While some have reduced their anticipated buys, none has yet walked away from the effort because of internal political discord.

The new estimated cost of $1.51 trillion assumes an international buy of 716 aircraft over the program's life; currently, the last U.S. aircraft is planned for 2037.

Full-rate production is slipping to fiscal 2019, when the Pentagon plans to buy 110 aircraft per year, including 60 F-35As and 25 each of the B and C versions for the Navy and Marine Corps, respectively. The Air Force has long hoped to ramp up its buy to 80 F-35As annually in order to reduce the cost. Thompson says that is now forecast to take place in 2021.

The preponderance of the cost increase—$107.9 billion—falls into the “operating and support cost” account, which will pay for flying hours and spares once the F-35 enters service. This estimate was derived from the Pentagon's Capability Assessment and Program Evaluation office and is 6% higher than the F-35 Joint Program Office's. Fuel costs consume about 14% of the projected operating and support cost increase.

The new estimate conservatively assumes the Air Force, Navy and Marine Corps will fund 100% of their F-35 sustainment requirements. However, typically they fund a lower percentage, allowing for some risk, Thompson says.

The program office is continuing a “should-cost” review of F-35 sustainment to target cost reductions. For example, the Air Force baselined purchasing more spares than it expects to need, and the service is trying to determine the correct amount, Thompson says. The services are also looking into collocating their maintenance and support centers.

Lockheed Martin officials emphasize what they say is good value for the money put into the program. In a statement, the company says it “remains confident that F-35 operations and sustainment costs will be comparable to or lower than that of the seven legacy platforms that it will replace.” Furthermore, it says the aircraft “will provide greater capabilities, while assuming a larger share of indirect costs, such as basing support, than that of legacy systems.” Company officials also suggest the Pentagon reduce the manpower dedicated to F-35 operations and “fully [use] planned support concepts.”

Meanwhile, the development and procurement estimates have also increased by 4.3% in the past year, in part because of a slower buy rate brought on by delays in flight testing. The Pentagon put off purchasing 179 fighters, adding about $5.3 billion to the cost; this shift ripples through the program and extends by two years both Air Force and Navy purchases, to 2037 and 2029, respectively. Consequently, the price tag for the engine also rises $1 billion.

In December 2010, the total development and acquisition cost—for both the aircraft and the Pratt & Whitney engine—was estimated at $379.4 billion; it is $395.7 billion now. Among the higher prices is a $4 billion increase in the estimate for labor hours as a result of data gleaned from the first four low-rate initial-production lots of aircraft.

Meanwhile, the program office hopes to soon wrap up development contract renegotiations with Lockheed Martin to solidify an incentive-fee schedule that emphasizes events such as design reviews and testing milestones. The new contract will be a cost-plus-award-fee deal, while production contracts will continue to stress fixed pricing for the aircraft.

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